Slush 2017: Demographics Have Shifted – How About Your Investments?

Moderator: Terri Hanson Meade — Managing Director, Class Bravo Ventures

Panelists:

Albert Wenger — Managing Director, Union Square Ventures
Monique Woodard — Venture Partner, 500 Startups

Demographics and demand are shifting but are investors adjusting to the shift? Terri Mead, Founder and Managing Director at Class Bravo Ventures, Monique Woodard, Venture Partner at 500 Startups, and Albert Wenger, Partner at Union Square Ventures, discuss the untapped market opportunities in products/services that target currently underrepresented markets.

TRANSCRIPT

Terri: Why do I feel like I’m on the game show?

Monique: I know.

Terri: Well, today I’m your host.

Monique: We’re on ‘Investor Survivor’.

Terri: Okay, so I’m going to throw these out because we’re already off track. Before I start I want to make sure that you all know that this is not a diversity and inclusion panel. We’re focusing on investing and how this all came about is and I feel it’s important to set the stage. Back in over the summer I was at a venture summit in in Napa, California where I met Monique and Monique was talking about flipping the table and one of the things that became very, very, obvious is there seems to be a misalignment between market demand in underserved markets and the investment dollars and it became very, very, clear when there was a white male investor who asked the question, ‘is the Black market big enough to support startups and invest dollars?’, at which point I realized that we really need to address this misalignment. So, this is why we have Monique here today speaking with us.

Monique: Yes.

Terri: And then one of the other areas is investing in women and Albert is on the board of Clue and I saw the founder of on stage here in Helsinki last year, and she is the one who coined the term ‘femtech’. So, in order for us to begin, let’s go ahead and start with our first question which I think is really very obvious:

Why don’t we see more venture capital going to startups focused on building and providing products and services for the underserved market?

Seems like a no-brainer to me. Women control 70% of consumer spend in the US and 80% of household healthcare spend — so why aren’t we seeing more of this?

Monique: So, I think if we talk about why capital isn’t going to some of the companies that already exist in these markets I think we have to talk about the numbers of venture capitalists who are women, the number of venture capitalists who are black or Latino because those things are related. Less than 1% of venture capital goes to teams with a black or Latino founder and roughly 1% of all venture capitalists are black or Latino and for women, only 7% of the GPs at the top 200 funds are female.

Albert: Yeah, and that’s up from only 3% a few years back.

Monique: Right, so if you look at these numbers on the investor side of the table there is under-representation that bleeds into under-representation in the direction that venture capital dollars move. You know, I can take it as an example one of our portfolio companies is called Mayvenn and when Diishan was raising money for Mayvenn, which is a hair extensions business, the pushback that he got from a lot of white male investors was ‘I don’t understand this market, why don’t you let me introduce you to someone else’. When there are so few venture capitalists who are black and/or women who might understand this market that’s really not an option. So, imagine if an investor today had an AI startup in front of him and said ‘I don’t understand anything about AI let me introduce you to somebody else who knows more about that than I do’. At this point in the game, you would say that investor isn’t really willing to do the diligence to understand a market that is going to be really big and that investor isn’t doing their job.

Albert: When we led the investment in Clue there was a comment online where somebody said, “oh venture capitalists really jumped the shark investing in these niche businesses” and somebody said, “wait…for women there are roughly three and a half billion women — that’s not a niche market”. I do think there’s this problem of what people call the availability bias right. So, in order to understand statistics, you have to actually spend time and effort understanding them and it’s much easier to just judge on instead of looking at statistics and drilling into market size. It’s just much easier to judge on what’s immediately available to you which is what your own immediate personal needs and demands are and so I think that’s makes certain businesses much harder to fund given what many pointed out.

Monique: And a lot of times when VCs see a company that has something to do with women they’ll say, “oh let me go ask my wife”. Well, that’s not a good answer because your wife isn’t necessarily the target market for what’s in front of you.

Terri: Which is what Jennifer Hyman encountered with Rent the Runway.

Terri: So, let me focus on, so I know you’re particularly frustrated with VCs who see investing in Black and Latino markets or LGBTQ or women is looking at it through a diversity lens.

Monique: Right.

Terri: Rather than looking at it as creating products and services for underserved markets, you know, over 50% of the population is comprised of women — we are not at niche market.

Monique: Right.

Terri: And if you look at the statistics in terms of multi-ethnic consumers in the US of a total buying power of $3.4 trillion, that is not a niche, that is not small…

Monique: And that’s just in the United States.

Terri: That’s just the United States. That doesn’t count other parts of the world. So, what is the market shift that you see so clearly and how should be seized be capitalizing on the opportunities for significant and real returns?

Monique: The biggest opportunity that I see is really around demographic growth and so the first of that is of course the US, by the year 2044, people of color will be the majority in the US and 37% of those people will be Black or Latino. That points to a major shift in the way that people use and consume technology. Then if you look globally, Africa is the fastest growing population in the world and 9 of the fastest growing economies happen to be on the continent [of Africa]. So, there is a big global opportunity that a lot of investors are just missing. When you start taking into account these demographic shifts, the way that people use technology differently in each of those communities and in each of those areas, you come away with this big market opportunity. People see it as diversity, but really, it’s about plain old market opportunity and returns. If you invest in some of these companies yes, your portfolio may start to look more diverse, but honestly; that’s just the organism working as it should be, right? The organism should be more diverse and when you start investing in these areas, then your portfolio looks more diverse. I would say that right now, in Silicon Valley and to some extent, the technology industry writ large: the organism isn’t necessarily working as it should be because it is not as diverse as it needs to be. So, I think that diversity is a byproduct of investing well.

Terri: Okay, so Albert — I’m going to just address the next question to you.

Albert: Sure.

Terri: So, I want to talk about the recent IPO of Stitch Fix and for those of you don’t know what Stitch Fix is clothing delivery primarily for women (although they have expanded into the male market).

Do you think that this is something that will ignite the interest of investors in startups that are targeting primarily female customers?

Albert: Yeah, there have now been a number of success stories. I think this is a particularly important one because it is a female founder targeting female demographic and you know, capital flows to where people are earning returns. So, I think this has been part of the pernicious cycle here that people don’t get businesses funded and because they don’t get them funded, there aren’t any exits and because there no exits people say, “well they’ve never been any exits so we won’t fund anything”. The Volvo Ocean Racing which is a big sailboat race just did something really interesting where they basically changed the rules to give some benefit to mixed male/female crews and the main argument was that unless there are female ocean racers with ocean racing experience, you won’t get them onto crews and how do you get them on to crews if they’ve never been on it, so it’s a similar circular thing. And so I think the reason the Stitch Fix IPO is so important, is because now it is something that people can point to and say, ‘look here’s an example of how this type of business is venture fundable and produces venture scale returns’. I think examples are really important and capital flows towards where returns have been earned, so I do think this makes a big, big, difference.

Terri: Well, what’s really interesting about that is they raised $42 million in venture funding before the IPO and $120 million raised in the IPO. They were profitable after 8 years and are now worth somewhere between $1.2 and 1.6 billion.

Albert: It’s very good execution, very capital-efficient execution. A lot of companies have raised way more money than this in the private markets and are having a hard time going public now. So, I do think it sets a lot of really good precedent.

Terri: Yeah, well hopefully, we don’t make female founders have to work so hard with so little in order to have a higher mark to even demonstrate success.

Monique: Some of that capital-efficiency is need-based. It’s much more difficult for women to raise money, especially when you’re working on a business that has a largely female demographic. It’s much more difficult for black founders to raise money especially when they are raising money with a black demographic and so that creates incredibly capital efficient businesses, especially resilient entrepreneurs and I think you see that play out in a lot of different examples, Stitch Fix being one of them.

Terri: One of the other areas we’re starting to see a lot more startups is in the healthcare space. I focus on digital health in femtech and pediatric health technology and we talked about femtech being everything from menstrual care, to fertility, to general health, and sexual wellness for women. One of the things we’re also seeing is that these startups are not all B2C. Maven clinic is now going B2B and providing a service that they are selling to employers as an offering to demonstrate that they are female and family-friendly employers.

Do you see this as potentially being more attractive to the primary male VCs or will the startups still be overlooked because of lack of relatability or the ‘ick factor’ so commonly associated with female-focused companies?

Albert: Well, I do think that going after B2B opportunities is something that some investors will find more attractive and will wrap the head around more easily. I think that could in the end be a mistake though because some of the most interesting opportunities today are to be able to go direct to the consumer, I think that’s fundamentally what the Internet has made possible and I think the most transformative companies in healthcare and in femtech will be the ones that go directly to the consumer. So, it may make it easier potentially to raise money but if that ease of raising money comes at the expense of the bigger opportunity, that might not be a great trade.

Terri: Do you have any thoughts on?

Monique: No, I would agree. I tend to be a more consumer-oriented investor anyway. I think that there are often a lot of opportunities that investors are overlooking because B2B seems a little bit easier to monetize and easier to understand for a lot of investors.

Terri: Where are you seeing progress and getting more money into the hands of startups focused on those particular markets or are you?

Monique: Where I’m seeing progress is seeing GPs step out and start doing their own funds to be honest. I don’t see it happening at any sort of scale in any of the existing top venture capital funds. But I do know a lot of GPs who have set up their own funds and are investing in this way. I wish that I was seeing more activity at large funds but that’s just not the case yet.

Albert: I think new firms being formed is a very effective way of competing for these markets and serving these markets. You know Forerunner Ventures, Kirsten Green’s firm has done a phenomenal job backing, e-commerce companies serving female markets and also female founders. So, I do think that’s a big opportunity. In some ways, change is easier when you form a new entity then when you’re trying to change the mechanics of an existing entity. I think something that’s really important to understand is sort of the longevity of firms and of individuals within firms. A single fund cycle is 10 years. So, you know, like a 3-4 year investment period and then 6+ years of harvest period. So, firms tend to be in business for a long time and they tend to not grow very much. So, for instance at Union Square Ventures, before we brought Rebecca on just now, the prior GP was Andy Weissman in 2012. That’s 5 years that we didn’t add a GP. So, I do think that new firms being started specifically to go after certain market opportunities is likely the faster change model.

Terri: One of those shifts that I’m seeing is that there are a number of women in the angel arena who are trying to get more women to invest in diverse market opportunities — not just in women’s products, but also for LGBTQ and other underrepresented markets. So, what are you guys seeing in terms of the expansion of introducing, not just new venture capitalists or moving from one fund to another, but how about in the angel space and getting women or other investors who typically wrote philanthropy checks or boughti another boat or bought another piece of art or something and getting them to shift over and put it into startups?

Albert: I definitely think going to the earliest stage in early stage funding is super important and whether that’s individuals or a firm like Backstage Capital that are explicitly set up. And again this is why change will be, unfortunately, somewhat slower than we would like it to be. I’ll give you an analogy with a city. New York City had a much smaller tech ecosystem and one of the problems was people hadn’t made money in tech. People had made money in Wall Street and they were funding businesses that they understood. They started funding tech businesses only after we had a series of exits and so we need something similar to happen. We need female founders and female operators and managers that have been successful in tech and made money in tech that then fund the next generation.

Monique: But that’s putting the onus on the people who most acutely feel the problem. Why not put the onus on institutional LPs who should really be backing some of these GPs?

Albert: It’s a great point. My point isn’t about trying to shift the onus it’s just I think the change the pace of change is slow in the industry. So, LPs are at the right point of leverage because that’s where the money for the VCs comes from, but it doesn’t address the angel question for instance. So, I do think the angel question is there’s some wonderful organizations like 37 Angels and Pipeline Fellowship. So, yes — we need a lot more of that.

Terri: Well, and there’s portfolio in order to train them because women haven’t traditionally been very comfortable with investing in this asset class. It wasn’t something that was necessarily introduced to them, didn’t understand it, didn’t know how it operated but one of the shifts that I’m also seeing has to do with the alignment of values, and so if you have philanthropy over here and ROI at all cost over here, what we’re seeing is an opportunity to do well and do good at the same time and investing in these underrepresented markets seems like a great opportunity to have more consistent doubles and triples because we may not see the huge outside outsized returns but we’re also not going to necessarily see the ROI at all costs. But we’re seeing within venture, 5% return on an average basis, which is ridiculously low. So, I’m also seeing the shift in terms of not looking for a unicorn every single time from a return perspective. So, Monique…this is super fun from a political perspective.

Do you think the political climate in the US will have any sort of an impact on either investing in supporting in or the addition of new startups supporting these markets?

Monique: [Laughs] Let me think about that…

Terri: Yeah, we have three and a half minutes left so where do we go?

Monique: Yeah, you know I think that the current political climate is making people — making the consumers more apt to support some of these businesses that are already in existence and so you’ll see more people talking about wanting to support women-led businesses, you’ll see more people talking about wanting to support you know, black-led businesses. So, I think that that’s a product of the political climate right now in the United States in particular.

Albert: Yeah, I would agree I think there’s a powerful counter reaction I mean more women are running for office than ever which I think is great. I think more women are starting businesses and with everything that they read about male VCs behaving badly I actually think that the counter-reaction will be a net positive.

Monique: Yeah, I mean do you think something like The Wing would have come about if there wasn’t this sort of big discussion now about behavior of men in the workplace? I think that that’s kind of one of the things that you see as an outcropping of this discussion. Women wanting to claim their own space and have a place where they can go and not be harassed and not be you know put down and all this sort of stuff that’s always happening in business and in offices and so having something like The Wing, you know, is a natural outpouring of that.

Terri: Well, and it gives women a comfortable place to be where they don’t feel like the outsider and they can actually have some level of camaraderie around people who are like them.

So, final question for both of you: if the majority of the capital is controlled by white male VCs, how do we let them know that if they don’t shift their investing strategies that they’re missing out on huge opportunities?

Monique: I think the only thing that speaks to people is losing out on something and returns speak for themselves. When there is a big deal — a big acquisition or a big IPO — that someone lost out on and didn’t invest in it because they didn’t see it. Either they never got a chance to invest in it so they actually didn’t see it or they had a chance to invest in it but passed. I think that is when change happens — when you lose something and you miss out on something. So, missing out on the Stitch Fix IPO or missing out on Sundial the acquisition by Unilever, The Wing at some point, missing out on all these opportunities — I think that’s what makes people change.

Albert: I second that and your earlier comment about institutional LPs. I think you know them saying we’re going to move our money to firms that have more diverse teams, that is also going to move the needle.

Terri: So, trying to encourage the source of the capital to influence the investing decisions of some of these more traditional venture capital firms. Well, worked just about at a time. So, thank you very much and thanks for listening.

Monique: Do we have some questions from the audience?

Terri: We do, but it’s not 100% relevant.
[LAUGHS]

Monique: Thanks.

[Applause]